Articles

Dispute resolution

Isiza December 2009
By Zarina Kellerman

Construction dispute resolution techniques are no longer confined to grim court or arbitration battles. Far more appropriate techniques have emerged; techniques which seek to preserve commercial relationships and minimise disruption to the progress of the works.

The late Chief Justice of the US Supreme Court, Warren Burger once wrote:

"Reliance on the adversarial process as the principle means of resolving conflict is a mistake that must be corrected… For some disputes, trials will be the only means, but for many claims, trial by adversarial contest must in time go the way of trial by battle and blood."

Many participants in the construction industry will readily bear testimony to court or arbitration battles which have come close to a literal spilling of blood. And for many years it seemed that there would be no end to the blood letting: conflict in the construction industry seemed endemic, with the only winners being the litigation attorneys, advocates, claims consultants and expert witnesses.

The tendency for disputes to erupt on construction projects and develop into figurative all-out warfare has been ascribed to several characteristics of the construction process including:

•    A culture of under competitive tendering with contractors who have won the work operating on the basis of "tender low, claim high".

•      A project team which has been assembled on an ad hoc basis without any consideration of whether the team can work together.

•      The function of the contract administrator whose position as independent certifying officer is considered at variance with being in the pay of the employer.

•     Poorly drafted contract documents.

In this context, when a risk unexpectedly eventuates during the course of a project and for which the contract does not provide a clear and precise solution, disputes arise.

Historically, the parties had little option but to proceed either to litigation or arbitration when disputes arose. These processes are highly adversarial, costly and perhaps most importantly, lengthy. In litigation or arbitration, winning is paramount, not necessarily finding a solution in the best interests of the parties and the project.

Once commenced, these processes tend to take on a life of their own, resulting in parties becoming entrenched in their positions and causing severe disruption to the progress of the project.

It has become accepted that, with some exceptions, arbitration and litigation are of little benefit to the ongoing project, to be used only as a last resort.

Companies are under enormous financial pressure and the construction industry is no exception. A lack of adequate cash flow affects the contractors, sub-contractors and specialist sub-contractors further down the supply chain equally.

A wide range of alternative options (sometimes referred to under the umbrella term of ADR – Alternative Dispute Resolution) are now available, which will assist in resolving disputes quickly but more importantly, cost-effectively.

Many of these procedures are preliminary processes which the parties can use to avoid a subsequent final determination by a court or an arbitrator.

These are typically procedures which are not finally binding upon the parties. It is common in modern construction contracts to find these techniques in layers or tiers; parties are required to move through several different dispute resolution mechanisms prior to resorting to arbitration or litigation.

The first port of call typically seen on construction projects, both domestically and internationally, is reliance on mediation as a means of resolving disputes.

Mediation can either be "facilitative" or "evaluative". In the former, the mediator merely facilitates discussion in the hope that a compromise will be achieved. In the latter, the mediator will, at the conclusion of the mediation, offer a view as to which party he or she thinks has the stronger case.

Mediation in the UK boasts an impressive success rate and the South African construction industry seems to have caught on to this. In addition, new company legislation may make it compulsory for companies to consider mediation as a means of resolving disputes before considering other options.

Commercial mediators are trained to assist parties to find their own settlements to a dispute. Construction relationships are generally ongoing from project to project and mediation allows for relationships to remain intact while at the same time resolving the dispute.

Other forms of dispute resolution include early neutral evaluation, mini-trials, adjudication, and Dispute Review Boards.

Indications are that there has not been a significant uptake of early neutral evaluation in the construction industry. However, it is likely that this technique will gain in popularity on the back of the increasing use of other non-binding dispute resolution procedures.

Mini-trials can take a number of forms. The most common is a process by which the parties present the essence of their cases by submissions and sometimes evidence to a tribunal made up of senior executives from the parties and a neutral chairman.

This is done within a strictly limited time to enable the neutral chairman to make a non-binding evaluation. It enables the parties to assess the strength of their own and the other party’s case, often resulting in a settlement.

In the UK, adjudication was thrust into centre stage in 1998 when adjudication became a compulsory procedure in all commercial construction contracts by virtue of the Housing Grants, Construction and Regeneration Act 1996.

In common law jurisdictions, where there is no statutory right to adjudicate (such as South Africa), such a right can be introduced by way of the contractual terms.

Typically, adjudication concerns the referral of a dispute to an adjudicator who reaches a temporarily binding decision within a period of 28 days or less.

The advantage of this procedure is that it allows the parties to have their dispute determined rapidly (if somewhat roughly), without the dispute escalating and becoming a disruptive influence on the progress of the project.

UK numbers indicate that more than 80% of adjudication decisions are simply accepted by the parties without resolution to arbitration or litigation. It is widely accepted that adjudication is one of the principal factors accounting for the significant reduction in litigation and arbitration in the construction field in recent years.

The uptake of adjudication in South Africa has been slow, perhaps because a culture shift is needed – parties that have not had experience in adjudication are unlikely to trust the procedure. It may be that statutory intervention is required.

It is unlikely though that such legislation will be seen any time soon if the tedious passage through parliament of the Arbitration Bill is anything to go by.

However, contractual adjudication is being introduced into the industry. Adjudication would certainly assist in achieving a speedy, cost-effective and binding resolution to the dispute where the adjudicator is independent, chosen by the parties and who has the requisite legal and technical knowledge.

The use of a Dispute Review Board (DRB) is a procedure whereby a panel of three engineers/lawyers are appointed at the outset of a project. The board visits site three or four times a year and deals with any incipient dispute, thus generally avoiding the escalation of disputes to the extent that they are taken to arbitration or court.

The decision of a board will ordinarily be temporarily binding. If one of the parties wishes to challenge a board's determination, the dispute must be taken to arbitration or court. The DRB is put in place at the commencement of the project. By contrast other procedures such as arbitration or mediation are simply invoked once the dispute has arisen.

South Africa has seen a rise in the use of DRBs. Their success in limiting disputes that escalate into litigation or arbitration matters has been attributed to factors such as:

• Regular site meetings promote a partnering spirit and providing a face-saving alternative.

• Parties temper their approach to contractual matters in the knowledge that the board is watching. Claims and defences are therefore "reality checked" by the parties before submission. Acrimonious correspondence is significantly reduced.

• Decisions or recommendations are provided rapidly enabling the parties to retain their focus on the progress of the project as opposed to the resolution of the dispute.

• An unexpected dynamic develops as the parties who work regularly on site see the board as "the other side". Accordingly, the project team often hastily compromises disputes to avoid the board "interfering" in the site's "private business".

The use of DRBs is certain to increase further. For those local construction companies that have used it, speak highly of its value add. Again, they allow for technically expert personnel, low costs and flexible ability to issue both non-binding and binding decisions.

With the range of techniques now available, construction dispute resolution has never been more exciting. It is imperative that the modern practitioner has a firm grasp of all these techniques; construction clients no longer expect their representatives in every case to inflict the gravest wound possible on their opponent.

Now, more than ever, what they expect is to be provided with effective and appropriate solutions which ensure the successful conclusion of a project and which, in the long term, benefit both parties.